Judge Weighs Fairness Of Citigroup’s $590 Million Investor Settlement

A federal judge questioned lawyers for Citigroup Inc. and shareholders at length at a hearing last month regarding the proposed $590 million settlement of the investor lawsuit involving its exposure to toxic mortgage assets. U.S. District Judge Sidney Stein in Manhattan asked if the settlement was fair considering that none of the bank executives named as defendants would contribute money to it. Judge Stein said that Citigroup’s current shareholders have been left to pay for the settlement under the current terms of the agreement. He was concerned about the impact on future bank conduct, citing the lack of any planned payments by individual defendants including former Chief Executive Charles Prince. Judge Stein asked this key question: “Should the Plaintiffs not also be concerned with deterrence as an issue in the settlement?”

At the hearing, Judge Stein also asked questions related to the settlement’s allocation plan and whether he should award Plaintiffs’ lawyers around $100 million in fees and expenses. The judge held off on ruling on the settlement or fee request. The hearing marked the latest instance of a judge questioning the fairness of litigation settlements with large financial companies. These are examples:

• Citigroup is separately waiting for an appeals court to decide whether U.S. District Judge Jed Rakoff properly rejected a $285 million settlement with the U.S. Securities and Exchange Commission.

• In March, U.S. District Judge Victor Marrero in Manhattan cited the SEC’s pending Citigroup appeal in holding off on approving the commission’s $602 million insider trading settlement with a unit of Steven Cohen’s hedge fund SAC Capital Advisors LP.

If approved, the class action settlement with Citigroup would resolve claims by shareholders from February 2007 to April 2008 that the bank misrepresented its exposure to securities known as collateralized debt obligations that were tied to mortgage investments. The settlement was announced last August. The New York-based bank lost $27.68 billion in 2008. The company’s stock price plunged from $47.89 at the start of the fourth quarter of 2007 to $2.80 by January 2009, the complaint said.

Under the settlement, Citigroup is paying the full $590 million. In an April 1 order, Judge Stein asked whether the absence of any payments from Prince and other individual defendants makes the settlement “unfair.” The case is In re: Citigroup Inc. Securities Litigation, which is on the U.S. District Court, Southern District of New York, No. 07-09901.